There’s no coming real estate crash
Are our real estate markets really going to collapse as so many economists and commentators suggest?
Over the weekend, I saw a headline suggesting that recent unemployment figures would be the latest “knockout” for our housing markets.
Unemployment has now fallen to 3.5%, its lowest level in 48 years and, while many see this as a good thing, June’s superb jobs data virtually guarantees that the Reserve Bank of Australia will raise the rate official interest rate of at least 0.5 percentage point. again in August.
Some economists even predict an increase of 0.75 percentage points.
Also by Michael Yardney:
I agree, the RBA is going to have to raise interest rates and that will further undermine consumer confidence because of course that is what it is supposed to do.
And yes, property values will drop, but I don’t see drops of 15-20% and certainly not 30% as one prominent commentator suggests.
The fact is that real estate price declines of this magnitude have never happened before.
Not during the recession of the 1990s, not during the global financial crisis and not during the period following the credit crunch of 2017/18.
In fact, the biggest annual decline in modern history took place when the “overall” Australian property market fell 5.5% in 2018.
The biggest peak-to-trough decline – the fall in house prices around Australia from their peak values to the bottom of the cycle – was recorded in 2018/19 when Australian property values fell 9.9%.
Then, just as now, we were bombarded with chilling headlines in the media about an impending real estate crash.
At that time we had just been through an APRA, Royal Banking Commission induced credit crunch and were concerned about the upcoming election with Labor promising to reduce negative debt and other tax incentives for homeowners land.
There is no “one” Australian property market
Of course, there will be a correction in the housing market – in fact it started earlier this year in Sydney and Melbourne – but property values continue to rise in Brisbane, Adelaide and Perth.
History shows that each market behaves differently and that there are markets within markets – houses, apartments, townhouses and villas – located in the large crown, the middle crown, the small crown and the CBD of each capital city.
Then there are hundreds of regional real estate markets and, as I said, they all behave differently.
The following chart shows the biggest house price declines from peak to trough in our various capitals since modern records began in 1987.
And there is no reason to suggest that this correction will be worse than those we have experienced in the past.
Of course, our housing markets face headwinds, including:
consumer confidence has taken a significant hit and it is affecting our housing markets, with buyers being more cautious and many taking a wait-and-see approach, while sellers’ confidence is more fragile.
Fear of rising inflation and cost of living pressures are keeping many home buyers away.
Rising interest rates reduced borrowing capacity
Uncertainty on our economic future with all the talk of a recession overseas, the ongoing geopolitical issues, the stock market crash is weakening buyer and seller confidence.
Affordability issues will limit many buyers: The impulse of low interest rates – allowing borrowers to pay more – has worked its way through the system.
Now, with property values 20-30% higher than at the start of this cycle – and at a time when wage growth has been moderate at best and minimal in real terms for most Australians – that means the average buyer won’t have more money in their pocket to pay more for their home.
Pent-up demand decreases: While many buyers have delayed their home buying plans in recent years due to COVID, a significant volume has already moved. There are only a limited number of buyers and sellers, so we can expect fewer looking to buy in 2022.
FOMO (Fear of Missing Out) is gone: Buyers are more cautious and take their time to make decisions. This is in stark contrast to last year, when many took shortcuts to enter the market.
On the other hand, there are many strong fundamentals underpinning our housing markets, including:
A shortage of good properties for sale and hardly any properties for rent.
International Immigration recovers, which will increase the demand for housing.
Small new construction in the pipeline – we’re just not building enough housing – and increased construction costs in an age of labor shortages means that the final value of new projects will need to be up to 20% higher to make the projects financially viable for developers.
Our the economy is still growing strongly and is very resistant.
Unemployment is at historic lows, which means anyone who wants a job can get a job (so they can pay the mortgage payments).
Wages are starting to grow.
Household balance sheets are strong – we have a “nature reserve” with $250-$260 billion in aggregate savings nationwide, much of it in offset accounts.
Many borrowers are ahead of their mortgage payments – Matt Comyn, chief executive of Commonwealth Bank, recently said that three-quarters of the bank’s loans were about two years ahead of repayments.
We have a strong banking system which has been strict in its lending criteria, meaning there are very few non-performing loans.
There is always government incentives to encourage first-time home buyers to enter the market.
Real estate forecast for 2022
The past few years have shown us how difficult it is to predict real estate trends, but recently, Andre Wilsonchief economist at My Housing Market, made the following projections for house price growth for the remainder of 2022:
Property values in Sydney will end the year down -6%, dragged down by the more expensive part of the market, but that’s after house values rose 31.6% over the past three years .
Property values in Melbourne will also fall -6% in the calendar year after rising nearly 19% in the past three years.
Property values in Brisbane will end the year up 11%
Adelaide property values will increase by 12% in 2022
Property values in Perth will end the year up 9%
Taking a weighted average, the overall average Australian property value will end up being about the same as it was at the start of the year, having increased by 30.8% over the past three years.
The bottom line
We have entered this next stage of real estate cycle adjustment faster than some expected, driven by the RBA’s earlier and more aggressive interest rate tightening cycle – in response to a surprisingly strong push of inflation.
Although this is largely due to offshore factors which can be expected to subside over time, the high inflation starting point and the domestic labor market tightening mean that the RBA moves aggressively on interest rates – moving them from COVID “emergency” lows to more “normal” levels”.
And while all of this will undermine consumer confidence and slow our real estate markets, there’s no real estate crash in sight.